State Independent Tax Tribunals: A Popular Alternative to Resolving Disputes

The recent trend favoring the
creation of independent tax tribunals as
a means to resolve state tax issues
prior to litigation is a significant
development in the area of adjudicating
state tax appeal controversies. The use
of an impartial, independent forum
outside the dominion and control of the
state tax authority is often helpful in
resolving state tax disputes in a more
efficient, streamlined manner by judges
possessing state tax expertise, without
taxpayers having to prepay the disputed
tax. This column examines the origins of
the independent tax tribunal, surveys
recent developments in this area, and
assesses whether more states are likely
to follow this trend.

Background

Taxpayers (and
their representatives) often find
themselves frustrated in the late stages
of an audit if it becomes clear to them
that a material tax assessment, with
associated interest and penalties, is
inevitable. This is particularly true
when the position the state tax
authority is questioning is strong and
the arguments the state tax authority is
advancing are not. In those situations,
taxpayers must consider their next move,
which can vary from state to state.
Often, once the assessment is issued,
taxpayers may appeal the assessment to
the administrative appeals unit within
the state tax authority, at which point
an informal or formal hearing may be
held. In some cases, following the
initial assessment, taxpayers can forgo
the additional administrative appeal,
pay the assessment, and then challenge
the decision in court.

Both of
these paths are fraught with problems.
In the first instance, the
administrative appeal is heard by a unit
of the state tax authority that just
issued the assessment. Typically, it is
difficult for taxpayers to obtain relief
when they are arguing their case in
front of a decision-maker who is part of
the same administrative entity as the
one that issued the assessment. As for
the second alternative, requiring
taxpayers to pay the assessment before
litigation may be unreasonable. The
required payment may be significant, and
the typically backlogged trial court,
with judges who have no tax background
and very little tax experience, means
that the dispute may not be resolved in
court for several years. That is
especially true if the trial court
decision is appealed. Compared with the
choice of accepting an administrative
decision that may merely reflect the
position of a state tax authority or
waiting a long time for a costly
judicial response that may or may not
vindicate the taxpayer, alternative
methods of dispute resolution have
become especially desirable in today’s
state tax environment.

TheABA ModelAct

One of these alternatives is a
quasi-judicial forum that is
independent from the state tax
authority. The 2006 American Bar
Association (ABA) Model State
Administrative Tax Tribunal Act
(Model Act)provides legislative language that
is intended to serve as a basis for
legislation on this issue in various
states. The Model Act was created as a
means “[t]o increase public confidence
in the fairness of the State tax
system” and calls for the development
of

an independent agency with tax
expertise to resolve disputes between
the [department of revenue] and
taxpayers, prior to requiring the
payment of the amounts in issue or the
posting of a bond, but after the
taxpayer has had a full opportunity to
attempt settlement with the
[department of revenue] based, among
other things, on the hazards of litigation.1

The Model
Act requires that the tax tribunal be
separate and independent from the
state tax authority,2 and that the principal
office of the tax tribunal be located in
a building separate and apart from the
state tax authority.3 When
hearings of the tax tribunal are held
outside of the principal office, they
must be held in a place separated from
facilities regularly occupied by the
state tax authority, again to ensure
independence both in fact and in
appearance.4 However, the
Model Act intends that the tax tribunal
be placed in the executive branch of
government, not the judicial
branch.5

The tax
tribunal’s jurisdiction is laid out in
the Model Act provisions. Generally, the
tax tribunal is intended to be the sole
authority for the hearing and
determination of questions of law and
fact arising under the tax laws of the
state (other than through judicial
review).6 The tax
tribunal is allowed to decide
constitutional questions, but it cannot
declare a statute unconstitutional on
its face.7 Taxpayers
can separate the constitutional and
nonconstitutional issues in order to
proceed with constitutional challenges
in court.8 In addition,
the Model Act requires the state tax
authority to provide an independent
administrative appeals function
following an assessment and prior to a
hearing in the tax tribunal, to dispose
of a majority of tax controversies
before litigation.9 The Model
Act also provides for a small claims
division of the tax tribunal, for
controversies of $25,000 or less.10

With
respect to procedure, the Model Act
provides that the parties should make
every effort to conduct discovery
informally and should stipulate all
relevant and nonprivileged matters where
possible.11 Hearings
at the tax tribunal are tried on a de
novo basis, without a jury.12 The tax
tribunal takes evidence, conducts
hearings, and issues final and
interlocutory decisions.13 Hearings
are typically open to the public.14 The tax
tribunal is not bound by the civil court
rules of evidence, although testimony
may be given only on oath or
affirmation.15 Decisions
are made in writing and must be rendered
no later than six months after the last
brief filed following the hearing (or
six months after the hearing if no
briefs are submitted).16 The
decision of the tax tribunal (other than
the small claims division) can be
appealed in the same manner as a
decision of a general trial court.17

The
Model Act contains broad rules on
who can represent taxpayers at the tax
tribunal:

Appearances
in proceedings conducted by the Tax
Tribunal may be by the taxpayer, by an
attorney admitted to practice in this
State (including an attorney who is a
partner or member of, or is employed by,
an accounting or other professional
services firm), by an accountant
licensed in this State, or by an
enrolled agent authorized to practice
before the Internal Revenue Service. The
Tax Tribunal may allow any attorney or
accountant authorized to practice or
licensed in any other jurisdiction of
the United States to appear and
represent a taxpayer in proceedings
before the Tax Tribunal for a particular
matter. In addition, the Tax Tribunal
may promulgate rules and regulations
permitting a taxpayer to be represented
by an officer, employee, partner or
member.18

The
broad provisions governing the
representation of taxpayers parallel the
practice within the IRS, the Tax Court,
and before most state tax authorities in
formal hearings.19

Status of IndependentTax Tribunals

While the
Model Act has been developed as a
template for states to follow when
considering the creation of an
independent tax tribunal, it is not
surprising that states vary in their
approaches, as they are wont to do in
matters of state taxation. And a number
of states already had in place one form
of tax tribunal or another before the
Model Act was finalized. As of June
2013, 31 states and the District of
Columbia have adopted some form of
independent state tax tribunal or court
(either in the judicial or executive
branch), in which there is at least some
level of independence from the state tax
authority, jurisdiction limited to tax
matters, published precedents, and
judges who are experienced in state tax
matters, without the need for taxpayers
to pay the assessment before the
hearing.20 The AICPA
State & Local Tax Technical Resource
Panel developed a summary matrix chart of
the current status of state tax
tribunals.21

In 2012 state legislative
sessions, Georgia and Illinois enacted
bills to establish independent state
tax tribunals. The Georgia tax
tribunal legislation, which followed
many of the Model Act provisions,
began operation on Jan. 1, 2013.22 While CPAs are not allowed to
represent taxpayers in the tax
tribunal’s main division,
Georgia offers a small claims division
for tax controversies that do not exceed
a certain threshold in which CPAs can
represent taxpayers.23 The
Georgia tax tribunal is operational, and
the first judge has been appointed.24

The
Illinois tax tribunal relied on many of
the Model Act provisions, though one
major departure from the Model Act
restricts representation at tax tribunal
proceedings to the taxpayer itself or to
an attorney admitted to practice in
Illinois.25 The
Illinois tax tribunal was scheduled to
begin operation on July 1, 2013, but has
been delayed to Jan. 1, 2014. So far in
2013, eight states have considered
creating a state tax tribunal, though
none have adopted them to date.26 The
authors expect this trend of state
legislatures considering state tax
tribunals to continue into 2014 and
future years.

The Issue of CPA
Representation

With the advent of
a new form of dispute resolution that
straddles the line between an
administrative hearing and a court
proceeding, the question of who can
represent taxpayers in this forum is
important. It is particularly important
for taxpayers, who need to know their
representation options if they decide to
appeal an assessment to a tax tribunal.
In addition to the types of
representatives who may practice at a
tax tribunal, a question has arisen over
out-of-state representatives. As
described above, Section 16 of the Model
Act provides that a tax tribunal may
allow both out-of-state attorneys and
accountants to appear and represent a
taxpayer in proceedings before the tax
tribunal in any matter. When adopting
the Model Act, states have typically
implemented the provision in a flexible
manner, often allowing all out-of-state
practitioners to practice in the tax
tribunal as a matter of course, which
benefits taxpayers who may feel more
comfortable using the same
representative in all multistate tax
matters.

The AICPA has monitored
this trend for several years and in 2012
released a paper to assist
state CPA societies.27 The
Institute generally supports the
creation of state tax tribunals and is
working with state CPA societies on this
issue. The AICPA believes that if a
state is considering possible
legislation on this issue, “Section 16.
Representation” of the Model Act should
be slightly revised to take into account
state CPA mobility laws, which were far
less prevalent when the act was adopted
in 2006.

Other Organizations’
Views on State Tax Tribunals

As
the number of independent tax tribunals
has proliferated in recent years,
several state and national groups have
publicly come out in favor of this
concept. For example, before Georgia and
Illinois adopted independent tax
tribunals,the Georgia
Chamber of Commerce28 and the
Illinois Chamber of Commerce29 supported
the creation of an independent tax
tribunal for disposition of state tax
disputes.

The Council on
State Taxation (COST) supports tax
appeal tribunals that are independent,
have trained tax judges, and have no
prepayment requirements:

Foremost
in good tax administration is a fair and
efficient tax appeals system. A state’s
ability to recognize the potential for
error or bias in its tax determinations
and to provide taxpayers access to an
independent appeals tribunal is one of
the most important indicators of the
state’s treatment of its tax customers.
The American Bar Association’s model
legislation for independent tax
tribunals should be considered by states
that do not currently have an
independent tax appeals process.30

The
Tax Executives Institute (TEI) also
supports independent state tax
tribunals. As of February 2012, the TEI
publicly stated its position of
encouraging all states to establish
prepayment, independent tax tribunals
presided over by individuals possessing
a strong knowledge of tax law. The TEI’s
view is that tribunals’ decisions should
be made public as a means to assist
taxpayers with compliance. The TEI
states the case for independence in no
uncertain terms:

The most
important attribute of a tax tribunal is
its independence. An impartial process
for resolving tax disputes is a hallmark
of both equitable tax administration and
a competitive business environment. This
perception of fairness also contributes
to better relationships between
taxpayers and tax administrators as
taxpayers would know that disagreements
with state auditors will not necessarily
need to be brought into the general
state court system. Similarly, state tax
administrators would be unlikely to make
arbitrary assessments knowing they could
be reviewed in an impartial forum.31

In
addition, the American Legislative
Exchange Council (ALEC) and the National
Taxpayers Union (NTU) support the Model
Act.

Conclusion

It is clear that the independent
tax tribunal is a forum that will
continue to grow in importance as
taxpayers and state tax authorities grapple
with methods to resolve disputes in an
impartial venue, without reaching the
option of last resort—litigation. The
overall success of the independent tax
tribunal process in each state will
ultimately be judged by the states’
ability to properly staff these forums
with capable and experienced arbiters
who truly are unbiased and can make
decisions without unduly lengthening the
process. Taxpayers need to be confident
that the independent tax tribunal will
properly protect their interests;
affording them an unfettered choice of
representation is an important component
of this aim. State tax authorities
should try to keep an open mind on the
value of an independent tax tribunal as
well. While the complexity of state and
local tax laws guarantees that taxpayers
and state tax authorities always will
have something to dispute, the
independent tax tribunal can make such
controversies a little less painful on
both sides and in the long run promote
tax compliance and a pro-business
reputation for the state.

Footnotes

1 ABA Model
Act, §1; see also Allen and Fields, “The
Model State Administrative Tax Tribunal
Act: Fairness for all Taxpayers,” 10
The
State and Local Tax Lawyer 83
(2005).

20 In
addition to the District of Columbia,
the 25 states with executive branch
tribunals are: Alaska, Delaware,
Georgia, Idaho, Illinois (in 2014),
Iowa, Kansas, Kentucky, Louisiana,
Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri,
Montana, New Hampshire, New York, North
Carolina, Ohio, South Carolina,
Washington, West Virginia, Wisconsin,
and Wyoming. The six states with
judicial branch tribunals are: Arizona,
Connecticut, Hawaii, Indiana, New
Jersey, and Oregon.

21 It should
be noted that four jurisdictions
(District of Columbia, Mississippi,
Texas, and Wyoming)
allow CPAs (in-state and
out-of-state) full rights to represent
taxpayers in all tax matters before an
independent tax forum with no additional
steps required. Ten states (Alaska,
Arizona, Delaware, Georgia, Iowa,
Michigan, New York, South Carolina,
Washington, and West Virginia) allow
CPAs (with limitations or additional
steps required) to represent taxpayers
in some fashion in a truly independent
tax forum in some tax matters.

26 The eight
states that considered, but failed, to
adopt legislation in 2013 to date are
Alabama (H.B. 264, S.B. 223); Colorado
(H.B. 13-1140); Iowa (H.B. 1446 and
H.S.B. 228); Kansas (H.B. 2413) (would
have established current tax tribunal as
an independent agency); Louisiana (H.B.
585 and H.B. 515) (would have created
tax court in place of current executive
branch tribunal); Oklahoma (S.B. 392);
Tennessee (S.B. 734, H.B. 961); and
Texas (H.B. 2488).

27 For more
information on the AICPA position and
resources on the issue, see the AICPA State Tax
Tribunals webpage. CPAs who want to
become involved in this issue in their
state should contact their state CPA
society.

Jamie Yesnowitz is a
principal with Grant Thornton
LLP in Washington, D.C., and is
the firm’s State and Local
Tax–National Tax Office practice
leader. Mr. Yesnowitz also is
chair of the AICPA State &
Local Tax Technical Resource
Panel. Eileen Reichenberg Sherr
is an AICPA senior technical
manager and staff liaison to the
AICPA State & Local Tax
Technical Resource Panel. For
more information about this
column, contact Mr. Yesnowitz at
jamie.yesnowitz@us.gt.com
or Ms. Sherr at esherr@aicpa.org.
The authors wish to thank Bruce
Ely, one of the originators of
the ABA Model Tax Tribunal Act,
for his help in providing input
and review of the article.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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